What is the main drawback of using ROI as the sole performance measure for investment centers?

What is the main drawback of using ROI as the sole performance measure for investment centers?

• A. It overemphasizes long-term value.
• B. It ignores cost of capital.
• C. It overvalues intangible assets.
• D. A) It can lead to short-termism and underinvestment in long-term projects.

Answer: (D)

ROI as a performance measure ties success to the short-term efficiency of the capital you’ve already invested. When managers are judged by ROI, they’re rewarded for boosting current profitability relative to invested capital, and they’re discouraged from tying up more capital in longer‑term projects with slower payoff. That pushes decisions toward quick, high‑margin gains and away from investments whose benefits emerge later, even if those investments would create greater value in the long run. In short, it encourages short‑termism and underinvestment in long‑term projects.

ROI as a performance measure ties success to the short-term efficiency of the capital you’ve already invested. When managers are judged by ROI, they’re rewarded for boosting current profitability relative to invested capital, and they’re discouraged from tying up more capital in longer‑term projects with slower payoff. That pushes decisions toward quick, high‑margin gains and away from investments whose benefits emerge later, even if those investments would create greater value in the long run. In short, it encourages short‑termism and underinvestment in long‑term projects.